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This Just In: More Upgrades and Downgrades

Maxim upgrades Netflix. That's right: UPgrades.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Up on Wall Street, everybody is piling out of Netflix(Nasdaq: NFLX) today, down 6% as of this writing (and counting.) Everybody but Maxim, that is, which came out with an upgrade on the nation's leading purveyor of flix-over-the-'Net this morning.

As you may have heard by now, Netflix "blew out da box" with its latest earnings report, posting an 96% rise in first-quarter profits, alongside the startling confirmation that one-out-of-eight Americans now subscribes to the company's DVDs-by-mail (and not just by mail) movie service. Regardless, investors are spooked by rumblings of what fate may await Netflix in years to come. As the company ramps up its competition with entertainment incumbents Time Warner(NYSE: TWX) and Comcast(Nasdaq: CMCSA), owners of HBO and NBC, respectively, and distributors Dish(Nasdaq: DISH), Verizon(NYSE: VZ), AT&T(NYSE: T), and DirecTV(NYSE: DTV), investors worry that profits are going to become harder to come by.

According to TheWall Street Journal, savings on reduced DVD mailings aren't racking up fast enough to offset the rising cost of adding streamable content for Netflix subscribers. The company warns that these latter costs have begun to "increase substantially" already in the current quarter.

Netflix tried to reassure investors that the investment it's making in developing an original series titled "House of Cards," for example, won't begin weighing on results until late 2012. This just left investors biting their nails, however, over worries that they'll have to wait nearly two years to know the extent of the damage Netflix's new initiative will wreak on their profits. With management already warning that profits in the second quarter could undershoot consensus estimates by as much as 21%, they may be right to worry.

Worry abounds, as do worriersThis troubling trend has many analysts on Wall Street expressing rumblings of reservation over the stock. Wedbush Morgan, for example, was quoted in the Journal today grumbling that streaming costs could double or triple between 2011 and 2012, to as much as $2.2 billion. Morgan Stanley sees the higher costs hurting Netflix's "ability to beat rising expectations." Stifel Nicolaus notes that Netflix's international investments will likely lose money this year, while Goldman Sachs fears that higher "monthly domestic churn of 3.9% ... is not going in the right direction." And Bank of America points out that "subscriber acquisition cost ticked up," and a "decelerating inflection point" could be near.

Scary trends, right? So why's Maxim up-grading the stock?

The price of being rightMaxim Group has one of the literal worst records on Wall Street. Not only has this analyst gotten 57% of its public stock recommendations wrong, it's also underperforming more than 80% of the investors against which it competes. And a big contributing factor to that is the company's prescient -- but wrong -- bet against Netflix two years ago. Suggesting investors sell Netflix back in January 2009, Maxim set the stage for a truly massive miss-out on potential profits.

Maxim's been dead wrong about Netflix for years, you see, and now it's taking advantage of the Netflix sell-off to pare its bets a bit. Perhaps it even aims to reclaim some glory, and remind investors "See, we told you Netflix was a bad bet." Don't believe it. Maxim was early to this sell-off party, and investors who heeded its advice back in 2009 have been treated to 511 (count 'em) percentage points worth of market underperformance on the pick.

Early ... but rightWhich is why it's so very disappointing to see Maxim cash in its chips today. You see, Maxim may not have been right about Netflix being a "sell" back then -- but it is right today. Or rather, it was right up until today -- before it finally caved, pulled its unfortunate "sell" rating, and ungraded the stock to neutral. The reason, as so often, comes down to price.

Selling for 66-times earnings today, Netflix is priced for a success that its 30% projected growth rate will be hard pressed to achieve. Valued on free cash flow, it's even pricier. In fact, I clock Netflix at about $175 million in annual cash-profit generation (figuring operating cash flow minus capital expenditures and spending on the DVD library to calculate free cash flow,) a number that lags reported income, and is low enough to price the company at more than 71 times FCF.

Fool contributorRich Smithdoes not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 616 out of more than 170,000 members. The Motley Fool has adisclosure policy.

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I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.